Just Eat's global head office off Fleet Street in London is a world away from the modest headquarters of Aussie Farmers Direct in Melbourne's south-east.

But investors in the world's largest online takeaway food aggregator and the small Victorian-based home delivery business were both suffering indigestion this week as the first cracks appeared in the $3.5 billion online food market.

Aussie Farmers and Menulog operate at different ends of the market, but retail expert Dr Gary Mortimer, an associate professor in marketing and business at QUT Business School, believes there is a common thread behind Aussie Farmers' collapse and Menulog's challenges.

HelloFresh chief Tom Rutledge says the meal kit and meal box market is still growing strongly, but operators need to execute well to succeed.
mrtomjones.com

"That's now having an impact on start-up businesses that are delivering food."

Online food sales are growing four or five times faster than offline grocery and takeaway food sales, but markets are becoming increasingly crowded as new players emerge and as incumbents such as Woolworths and Coles lift their game.

Fabian Siegel (l) and Rolf Webber of meal kit company Marley Spoon, which is considering an IPO.
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Louie Douvis

For example, in inner-city Brisbane where Mortimer lives, there are at least four online takeaway food operators – Uber Eats, Foodora, Deliveroo and Menulog – vying for business and essentially offering the same service.

"I drive past some (restaurants) in New Farm and there are four or five young guys sitting on bikes chatting and waiting for their phones to ring with the next order," Mortimer says.

Mortimer expects to see more consolidation among online food aggregators following Just Eat's $855 million acquisition of Menulog, which came only months after the merger of Menulog and EatNow in 2015.

"I don't think it's sustainable," Mortimer says. "I just don't think the volume of people ordering from local cafes and restaurants will be sufficient for four players to remain viable in the market."

"Maybe in Darlinghurst and Marrickville and highly urbanised areas with high disposable incomes it is possible, but as you move out of the CBD areas and into the mortgage belt I don't think the market is viable there.

"Consumers will start to look very carefully at what they get for what they're spending - it will become a case of those four players focusing on price because ultimately the service is exactly the same."

Takeaway penetration low

Menulog managing director Alistair Venn disagrees, saying online takeaway food penetration is still relatively low in Australia, about 10 per cent compared with 34 per cent in Britain and 7 per cent in the US.

Takeaway food operators like Uber Eats, Foodora, Deliveroo and Menulog are all vying for business and essentially offering the same service.
Bloomberg

"There's a very large opportunity – we know customers would like to order more," Venn says.

"Delivery is growing faster than offline and there's still a large amount of transactions that continue to happen over the phone," he says. "We believe online food delivery will continue to grow in the future."

The online takeaway food market grew 30 per cent to $1.5 billion in 2017, according to Morgan Stanley, with aggregators estimated to account for about $600 million of total transaction value.

Menulog, which is the market leader, saw revenues rise 25 per cent to about $88 million in 2017 after growing 64 per cent in 2016 and 94 per cent in 2015. Its transaction values are estimated to be more than $500 million.

However Morgan Stanley says Uber Eats, which entered the Australian market in 2016 and is now in at least 12 cities, is catching up fast.

While consolidation is likely in the aggregator market, Mortimer believes there is room for multiple players in the meal kit and prepared meals market, which is estimated to account for about $600 million of the $2 billion online food market.

The meal kit and prepared meals market is dominated by HelloFresh and Marley Spoon, both of which are part-owned by German e-commerce incubator Rocket Internet. HelloFresh's parent listed on the Frankfurt stock exchange last November and Marley Spoon is considering a listing in Australia.

There are also a number of smaller players including Pepper Leaf, Youfoodz, Queensland-based FivePointFour, Tastebox, The Cook's Grocer, Your Grocer, Thomas Farm Kitchen, and Gourmet Dinner Service, servicing different market niches. One company, Dish'd, went out of business last year.

Grocery giants

The major supermarket chains are also getting in on the act, with Woolworths recently launching a new range of premium meal kits which include all the ingredients needed to make dishes such as Moroccan tagine, Spanish paella, and beef teriyaki.

"Customer feedback has been positive, and we know it's a compelling offer to be able to walk into the front of the store, grab one of these meal kits, and go through the checkout within a matter of minutes," says Jim Fader, general manager of Woolworths FoodCo Fresh.

Restaurant owners fear commissions could rise due to the high market concentration.
Eddie Jim

There may also be scope for Woolworths, Australia's largest online food retailer, to sell these meal kits online.

"(The meal box) market is getting more intense but ... there's certainly room for multiple players in this space as long as they're not trying to replicate what others are doing," Mortimer says. "As long as these businesses understand their core market there are opportunities there."

"Aussie Farmers would have been successful if they'd focused on a niche," says Mortimer. "They started with fresh produce – that was perfect – they tapped into consumers wanting to make ethical purchases and supporting local economies and local jobs. That was a great story to tell and it worked well for them.

"Then they branched out and broadened their range and it stopped being scaleable. They franchised the model, so (franchisees) were spending $100,000 to buy a truck with their signage and selling highly perishable product with very low margins so it was very hard to get a return on investment."

HelloFresh chief executive Tom Rutledge says the meal kit and meal box market is still growing strongly, underpinned by demand for convenience and relief at having the daily dilemma of what to cook for dinner resolved.

"I don't think rationalisation is inevitable but given the expertise required to deliver meal kits (in all parts of the supply chain) the opportunities are only on offer for businesses with the right offering and a strong ability to execute," Rutledge says.

"Accordingly, we have seen meal kit proponents (including Marley Spoon) close down in other markets where we not only remain active but continue to thrive.

"The offering obviously needs to serve a consumer need. On top, there is a commercial need to ensure that basket sizes and margins are sufficient to get a return on marketing investment."

The meal kit and prepared meals market is dominated by HelloFresh and Marley Spoon.
Marcus Nilsson